Well Control Rule Could Halve Drilling

Initial findings from a study conducted by international research consultancy Wood Mackenzie confirm that the high cost of a proposed new rule governing oil and gas operations in the Gulf of Mexico could significantly reduce domestic energy production and curtail U.S. economic activity, energy supplies, and state and federal offshore revenues.

In April 2015, the Interior Department’s Bureau of Safety and Environmental Enforcement (BSEE) proposed the sweeping Well Control Rule, a set of complex and highly technical regulations that impose expansive new requirements on offshore oil and gas drilling. The new requirements included in the proposed rule call for far reaching changes to the rules by which the oil and gas operators are governed and would increase costs in a manner that will severely impact Gulf Coast economies, states industry association the Gulf Economic Survival Group.

According to initial findings released on Monday, the study found that under an $80 oil assumption, comparable to the price assumptions used by BSEE in developing the rule, the Interior Department’s draft rule would:

• Decrease exploration drilling by up to 55 percent or 10 wells annually
• Reduce Gulf of Mexico production by as much as 35 percent by year 2030
• Result in 105,000 – 190,000 jobs at risk by 2030; this may include jobs beyond the energy sector;
• Most notably, 80 percent of these jobs could be in Louisiana and Texas.

“It is important that we conduct further study of the finer points and practical effects of this new rule before forcing it on companies engaged in operations in the Gulf. Our nation as a whole would feel the impact of reduced domestic energy production stemming from this rule, with a particularly harsh blow to Gulf energy-producing states, where people are already suffering from the impacts of low crude oil prices,” said LeBlanc.

“We share BSEE’s intent of developing a rule that enhances safety and environmental protection; however, several provisions in the rule are not consistent with this goal,” said LeBlanc. “Some provisions of the Well Control Rule inadvertently increase risk to the safety of workers due to the one-size-fits-all prescriptive approach, as well as the exceedingly high costs involved in implementing it as written today.”

Industry group NOIA’s President Randall Luthi issued the following statement:

“The Wood McKenzie study released today on the costs of BSEE’s proposed well control rule is a clear reminder of the consequences that unnecessarily burdensome regulations have on the U.S. economy and our country’s energy security. While the proposed well control rule purports to improve safety, an overly prescriptive rule may actually decrease safety and increase risk and, as the study shows, put over 100,000 jobs at risk, cost the U.S. economy upwards of $400 billion, and jeopardize as much as 35 percent of offshore energy production.

“A federal regulation of this magnitude must be carefully crafted to actually focus on ways to improve safety and allow companies to adopt its requirements in a safe and practical manner, instead of the current approach which seems to be designed around a political objective and deadline. Getting this rule right is more important than rushing the rule out on an arbitrary deadline. We urge the Administration to carefully consider the findings of this study before finalizing the rule.”

BSEE says the proposed rule is designed to improve equipment reliability, building upon enhanced industry standards for blowout preventers. The rule also includes reforms in well design, well control, casing, cementing, real-time well monitoring and subsea containment. It is the result of recommendations from various investigations into the Deepwater Horizon tragedy where the blowout preventer (BOP) buckled around the time a surge of natural gas from the well ignited, causing an explosion which killed 11 crew members. The blowout preventer punctured a pipe that led to about five million barrels of oil being released before the well was closed off 87 days later.

On first announcing the new rule in April last year, BSEE stated that it was another step in the most ambitious reform agenda in the department’s history to strengthen, update and modernize offshore energy regulations. “Interior has made sweeping reforms for safe and responsible development, overhauling federal oversight by restructuring to provide independent regulatory agencies that have clear missions and are better-resourced to carry out their work, while keeping pace with a rapidly evolving industry.

According to BSEE, the rule will, amongst other things:

• Incorporate the latest industry standards that establish minimum baseline requirements for the design, manufacture, repair, and maintenance of blowout preventers
• Require more controls over the maintenance and repair of BOPs.
• Require the use of BOPs with double shear rams, which is now a baseline industry standard (API Standard 53).
• Require more rigorous third party certification of the shearing capability of BOPs.
• Require real-time monitoring capability for deepwater and high-temperature/high pressure drilling activities.

The Wood Mackenzie study is based on a scenario analysis built upon specific assumptions around pricing, costs, and field developments. The forecasting period is depicted to 2030 with period to 2025 separated out to differentiate between a 10-year and 15-year impact. A final report detailing all of the study’s findings is expected to be released later this month.

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